# WACC Calculator

> Calculate weighted average cost of capital from equity/debt weights, costs, and tax shield.

**Category:** Finance
**URL:** https://complete.tools/wacc-calculator

## How it calculates

WACC is calculated using the formula: WACC = (E/V × Re) + (D/V × Rd × (1 - Tc)), where: E = market value of equity, V = total market value of the company (equity + debt), Re = cost of equity, D = market value of debt, Rd = cost of debt, and Tc = corporate tax rate. The formula reflects the weighted average of the costs of equity and debt, adjusted for the tax impact of debt financing. Each component contributes proportionally based on the company's capital structure. For instance, if a company is primarily financed through equity, the cost of equity will dominate the WACC calculation, while a higher proportion of debt will increase the impact of the cost of debt after adjusting for the tax shield.

## Who should use this

1. Financial analysts assessing company valuations during mergers and acquisitions. 2. Corporate finance managers preparing for capital budgeting decisions based on investment returns. 3. Investment bankers determining the feasibility of financing options for clients. 4. Academic researchers analyzing the impact of capital structure on firm performance. 5. CFOs evaluating the cost-effectiveness of different funding sources for strategic initiatives.

## Worked examples

Example 1: A company has $500,000 in equity and $200,000 in debt. The cost of equity is 10%, the cost of debt is 5%, and the corporate tax rate is 30%. First, calculate V: V = E + D = $500,000 + $200,000 = $700,000. Then, compute WACC: WACC = ($500,000/$700,000 × 0.10) + ($200,000/$700,000 × 0.05 × (1 - 0.30)) = 0.0714 or 7.14%. Example 2: A startup has $300,000 in equity and $100,000 in debt, with a cost of equity of 12% and a cost of debt of 6%. The tax rate is 25%. Calculate V: V = $300,000 + $100,000 = $400,000. WACC = ($300,000/$400,000 × 0.12) + ($100,000/$400,000 × 0.06 × (1 - 0.25)) = 0.09 or 9%.

## Limitations

This calculator assumes constant costs of equity and debt, which may not hold true in volatile market conditions. It also presumes that the capital structure remains stable, which can be inaccurate if a company is undergoing significant financing changes. Additionally, the model does not account for the potential impact of financial distress on the cost of debt. Furthermore, the tax rate used should reflect the marginal tax rate applicable to the company, which may differ from effective tax rates. Lastly, precision limits may arise when dealing with very small or large values, potentially leading to rounding errors in the calculations.

## FAQs

**Q:** How does the tax shield affect WACC?


**A:** The tax shield reduces the effective cost of debt by allowing interest payments to be deducted from taxable income, thereby lowering the overall WACC. This makes debt financing cheaper relative to equity.


**Q:** Why is the cost of equity typically higher than the cost of debt?


**A:** The cost of equity reflects the higher risk associated with equity investments compared to debt. Equity investors require a higher return due to the potential for loss, as they are last in line during liquidation.


**Q:** Can WACC be negative?


**A:** WACC cannot be negative in a typical scenario since it represents a cost. However, if a company has an extremely high debt level with low or negative returns, the calculated WACC may approach zero, but practically it should remain positive.


**Q:** How frequently should WACC be recalculated?


**A:** WACC should be recalculated whenever there are significant changes in capital structure, interest rates, or the company's risk profile. Periodic reviews are also advisable to ensure that financial assessments remain accurate.

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